The Rise and Fall of the Arbitrage Pricing Theory

Abstract

The Arbitrage Pricing Theory (APT) was proposed as a more complex and therefore more complete alternative to the Capital Asset Pricing Model (CAPM) which was thought to be too simple and limited in scope to be a useful or empirically testable theory. In the end it turned out that what the APT had to offer was nothing more than complexity for the sake of complexity. In this paper we review this eventful chapter in the history of finance to gain the insight that research fads often subvert the orderly accumulation of knowledge.